Session 4. Growth Stylized Facts on Standards of Living across Countries Characterizing Growth over 1 Years: The US Economy Growth Dynamics of the G7 Countries and the OECD Economies Characterizing Growth for the World Economy The Determinants of Economic Growth. The 4 I s of Economic Growth The World Economy Share of Global GDP Year 211 (PPP) Emerging, 49% Advanced, 51% 1
Other Emerging, 23% The World Economy Share of Global GDP Year 211 (PPP) EU, 2% BRI, 12% US, 19% China, 14% Other Advanced, 12% Measuring GDP Across Countries Production (GDP, 211). Measured in USD (PPP) Germany 3.9% India 5.7% Brazil Russia 2.9% 3.% UK 2.9% France 2.8% Italy 2.3% Japan 5.6% China 14.3% Rest 37.4% US 19.1% 2
Shifting Powers World Economic Center of Gravity 198 Today 25? Source: Danny Quah (LSE) The World Economy Share of Global GDP Year 15 (PPP) Advanced, 21% Emerging, 79% 3
12. Population Trends 1. 8. 8.7 Billions 6. 5.7 4. 3.4 1.7 2..8 1.1 1.3 1.4. 193 195 197 199 21 23 25-2. Advanced Emerging What about GDP per capita trends? GDP Per Capita (USD, PPP). 211. 5, 45, 4, 35, 3, 25, 2, 15, 1, 5,??? USA China Japan India EU Russia Latin America? Sub- Saharan Africa World 4
Forecasting 8 Years Ahead US Real GDP per Capita 599 11 22 1 1. Put yourself in 1928. have been asked to forecast income per capita in the year 29. 81 9 3 8 187 1876 1882 1888 1894 19 196 1912 1918 1924 193 1936 1942 1948 1954 196 1966 1972 1978 1984 199 1996 22 28 Forecasting 8 Years Ahead US Real GDP per Capita 599 11 2. You collect data for GDP per capita from 197 to 1928. 22 1 81 9 3 8 187 1876 1882 1888 1894 19 196 1912 1918 1924 193 1936 1942 1948 1954 196 1966 1972 1978 1984 199 1996 22 28 5
Forecasting 8 Years Ahead US Real GDP per Capita 599 11 22 1 81 9 4. Use the fitted trend to forecast US income per capita. You find that it grows by a factor of 4.5 and will reach $49,773 in 29 3. Fit a trend that assumes a constant growth rate 3 8 187 1876 1882 1888 1894 19 196 1912 1918 1924 193 1936 1942 1948 1954 196 1966 1972 1978 1984 199 1996 22 28 Forecasting 8 Years Ahead US Real GDP per Capita 599 11 22 1 81 9 5. You predicted $49,773 in 29 and the actual number is $46,381, an error of 7%. Not bad. You deserve a promotion. 3 8 187 1876 1882 1888 1894 19 196 1912 1918 1924 193 1936 1942 1948 1954 196 1966 1972 1978 1984 199 1996 22 28 6
Technological Revolutions Take Place 9.2 World GDP Per Capita 8.7 6, GDP Per Capita (27 USD) 8.2 7.7 7.2 3, 6.7 6.2 5 5.7 2 4 6 8 1 12 14 16 18 2 Year but not as often as we think. The New Economy. It seems almost too good to be true With the information technology sector leading the way, the U.S. has enjoyed almost 4% growth since 1994. This spectacular boom was not built on smoke and mirrors. The result is the so-called New Economy: faster growth and lower inflation. We are in a period of the most wonderful progress in science and invention, especially as applied to communication and transportation, this or any other country has ever known. It is obviously our present great fortune to live in what, in the light of history, will be recognized as a golden age of American industry. 7
US Economy: Summary Very stable growth rates over the period 187-29 Do not take this growth rate for granted. It is based on a continuous effort to innovate, to improve production processes. A succession of small revolutions (like the new economy ) The US economy seems to be at a steady-state where economic conditions are such that investment and research efforts undertook by companies over this period have produced a fairly even pattern of growth in economic activity This pattern is surprising giving the amount of changes we have seen over this century. For example R&D to sales ratio are today much higher than 1 years ago. Why doesn t it lead to higher productivity growth? Advanced Economies Real GDP Per Capita (PPP) USA UK Germany France Italy Japan 187 1887 194 1921 1938 1955 1972 1989 26 8
Did Convergence Stop in the 7s? France relative to the U.S. 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 83% 94% 73% 73% 7% 71% GDP per capita GDP per worker GDP per hour 197 29 The French are as productive as the Americans when they work It is not only about technology, effort matters! Hours per worker in France, Germany and the US For the past forty years there has been a clear downward trend towards shorter workweek in Europe. Today a worker in France works 15 hours per year, while in the US, workers work about 18 hours. Average GDP per hour in France and the US 2,1 2, 1,9 1,8 1,7 1,6 1,5 1,4 197 1975 198 1985 199 1995 2 25 France Germany USA 4 During the process of convergence income per hour worked in France has been raising more rapidly than in the US. Since early 198s convergence in productivity has ended and since then US and French income per hour worked has been growing at the same rate. $ per hour 3 2 1 196 1969 1978 1987 1996 25 France USA 9
Characterizing Long-Term Growth for G7/OECD Economies OECD economies have been converging to similar levels of GDP per capita. Some countries are further along the process while others still have room to converge As countries converge to US levels of GDP per capita, their growth rates decline. Countries are approaching their steady state. The steady state might not be the same for all countries. For example, a very patient society (one that values the future more relative to the present) will be willing to invest more than a less patient society. As a result, its steady state will be higher. These dynamics are well described by The Solow Model (as proposed by Robert E. Solow in 1956). Emerging Markets: Real GDP Per Capita (PPP) Chile Brazil USA Argentina Korea India China 19 1912 1924 1936 1948 196 1972 1984 1996 28 1
1 Assignment Real GDP per capita. PPP. (% of US) 9 8 7 6 5 4 3 2 Australia Brazil Bulgaria Canada China Egypt France Greece 1 198 1984 1988 1992 1996 2 24 28 14 Assignment Real GDP per capita. PPP. (% of US) 12 1 8 6 4 2 India Japan Lebanon Mexico New Zealand Singapore South Africa 198 1984 1988 1992 1996 2 24 28 11
Growth Miracles and Growth Disasters Average annual growth rates of GDP per capita (196-21) Fast Growth Annual % Slow Growth Annual % China 6.7 Nigeria 1.45 Korea 5.58 Philippines 1.41 Botswana 5.53 Algeria 1.15 Singapore 5.21 South Africa.87 Ireland 3.42 Lebanon.5 Japan 3.4 Nicaragua.6 India 2.99 Venezuela -.1 Spain 3.31 Niger -.6 Panama 2.75 Iraq -2.5 Characterizing long-term growth Is there convergence? Starting with the sample of OECD economies we see convergence (poor countries grew faster than rich countries) 7 Annual Growth 196-21 6 5 4 3 2 1-1 South Korea Singapore Ireland Norway Turkey USA Australia Switzerland Mexico 5 1 15 2 GDP per capita in 196 12
Characterizing long-term growth Is there convergence? As we add other countries we see an increasing number of deviations from the convergence rule. Annual Growth 196-21 7 6 5 4 3 2 1-1 China Botswana India Colombia Philippines Nigeria Algeria Venezuela 5 1 15 2 GDP per capita in 196 Characterizing long-term growth Is there convergence? When we include 1 countries, there is no convergence. There is a large number of poor or middle-income countries that do not live up to their potential. 8 Annual Growth 196-21 6 4 2-2 5 1 15 2-4 GDP per capita in 196 13
What drives Growth differences? Production is the result of two factors: 1. Inputs in the production process: hours, capital (a result of investment in physical and human capital, knowledge) 2. Their productivity, which is also driven by investment in capital, knowledge, technology Hypothesis: Countries that invest more grow faster. Investment rates (as % of GDP) over the last 3 decades Singapore 35% Venezuela 2% Investment rate in China today: 42%!!! Investment and Growth The main determinant of growth is accumulation of capital. Countries with higher investment rates have outperformed countries with low investment rates. Growth GDP per capita (%) 1 8 6 4 2 Sierra Leone Investment and Growth USA Chile Brazil France India Botswana Mauritania Singapore China Venezuela 1 15 2 25 3 35 4 Niger -2 Investment in physical capital (% of GDP) Period: 198-21 Korea 14
Determinants of Economic Growth Productivity (technological progress) if you are close to the frontier. Investment (in physical capital, in education, ) if you are far from the frontier. But what drives Investment? Institutions: property rights, absence of corruption, good governments Stability (macroeconomic and political) Institutions Drive Investment and Growth Singapore Brazil Procedures to start a business 3 16 Days to open a business 3 12 Hours processing forms (yearly) 84 2,6 Taxes as % of profits 28% 7% 15
Institutions can be measured Country Ease of Doing GDP Per Capita Business Rank (USD PPP) Singapore 1 45,978 United Kingdom 4 32,147 United States 5 41,761 Ireland 9 36,278 Japan 18 29,692 Malaysia 21 12,724 Germany 22 32,255 Portugal 31 21,4 Hungary 46 16,896 Poland 7 16,75 Vietnam 78 2,682 China 79 6,2 Russian Federation 123 13,611 Brazil 127 9,455 India 134 2,97 Congo, Dem. Rep. 175 29 Source: Doing Business 211, World Bank; GDP per capita in 25 USD (PPP). 2 Oil Producing Countries Institutions Matter Norway 1.5 Chile Poland Singapore 1 India USA Institutional Quality.5 -.5-1 Liberia Niger Indonesia Namibia Brazil Greece UAE Saudi Arabia Russia China -1.5 Venezuela -2 25 68 1847 521 1365 3713 GDP Per Capita (21) Source: Fatás and Mihov (HBR 29) 16
Summary on Economic Growth: The Four I s Innovation The incentives to innovate (e.g. respect of intellectual property rights) will shift the technology frontier. This is the main force behind growth in the developed countries. Initial conditions Provides the potential for catching up. Poor countries can grow faster when they set on a convergence path to the rich economies Investment A key ingredient in the process of convergence is the building up of the capital stock. This requires high investment rates. Miracles are countries with investment of over 25% of GDP. In addition to physical investment, it is important to invest in human capital, efficiency, technology What drives investment: stability, institutions. Institutions The best way to ensure sound macroeconomic policies (i.e. stability) and political stability is to build institutions that create incentives for stability: Independent central bank, checks and balances, rule of law, transparency. Source: Fatás and Mihov (HBR 29) US, Japan, France, Germany China today, Singapore in 8s High growth (Korea) 35%; Steady state (US, Germany) ~ 18% There is not a single country that has become rich with poorquality institutions Session 4. Summary v The 4 I s framework summarizes how economic success has been a result of providing the appropriate conditions (macroeconomic and institutional) for investment and, more generally, for business creation to take place. v Growth in income per capita is the outcome of accumulation of capital and productivity growth. v Investment (understood broadly) drives capital accumulation and productivity growth. High investment rates are needed to grow fast. v The growth dynamics of the world economy can be characterized by v The US and other OECD countries (the technology frontier ) are growing now at a steady rate v Some countries approach fast the technology frontier v Other countries have not been able to follow this convergence process 17